While India has favourable supply side dynamics, thanks to its strong agriculture base, product development and innovation in the sector has taken a back seat due to lack of investments and incentives, finds a CII report on Indian Food & Beverage sector — The new wave prepared in association with Grant Thornton.

The report released at CII’s Food and Bev Expo & Summit, which aims to examine the growth potential of the food and beverage industry also highlights that rising food prices have been a constraint for the sector and is expected to impact the demand if not controlled soon.

The report suggests that while some of the Indian players are making use of newer technologies to increase production, meet international quality standards and thereby increase profitability, the adoption has been sporadic since the industry is largely unorganized. While, the market opportunities have been emerging in the recent past, requirement of investments, lack of bank credit facility and long gestation period have been impeding the adoption of newer technologies.

“The growth of food processing sector would need to be a significant component of the second green revolution, considering its possible role in achieving increased agricultural production by ensuring better remuneration for farmers. The food processing sector makes it possible by not only ensuring better market access to farmers but also by reducing high level of wastages. A developed food processing industry will reduce wastages, ensure value addition, generate additional employment opportunities as well as export earnings and thus lead to better socio-economic condition of millions of farm families”, said Piruz Khambatta, chairman, CII National Committee on Food Processing, CII Food and Bev Expo & Summit & CMD, Rasna.

The report highlights that the organised food sector is expected to increase on the back of favourable demographics (middle class, urbanisation), rising disposable incomes (per capita income, double income groups) and changing lifestyle preferences (convenience necessitated by professional commitments, rising aspirations) and is expected to drive the growth, generally, in food and beverages market and specifically in the organised retail market as the average propensity to consume is expected to increase further.

“The future of the food & beverages sector looks promising with the growing demand due to change in the consumer’s lifestyle and consumption patterns including food habits. While the Indian agriculture sector is gearing up for supply with support from Government, food processing is expected to play a key role in bridging the gap between the demand and the supply sides and addressing the key concerns of the sector – rising food prices and high levels of food wastage. The industry’s growth is dependent on the ability to organise, invest and innovate to deliver high value products to the consumer”, said Shanthi Vijetha, director, Grant Thornton India LLP.

Food processing was earlier limited to food preservation, packaging and transportation, whereas the industry has evolved and widened its scope with emerging new trends in consumer preferences and the advancement in technologies adapted to meet those preferences.

With the increase in attractiveness of the food processing industry, there has been significant deal activity in this space with mixed contribution from corporate M&A and private equity investments. While the dairy segment has witnessed primarily PE deals with few M&A, fruits &vegetables as a segment is yet to evolve for food processing industry. This is evident from the deal space where only two PE transactions took place in the last 3 years.

Commenting on the future of the sector, Harish HV, Partner, Grant Thornton in India said, “Despite constraints linked to infrastructure, market access and funding, dynamic businesses operating in this sector have made their mark on the global stage. I am confident that the next few years will be the golden years for the food and beverage sector.”

The report highlights that though food retail constitutes only 15% to 20% of organised retail industry, it constitutes 70% of unorganised retail industry. It will be the organised players who will tap the growth opportunities as they can make investments for backend infrastructure and compliance matters. The report also shows that higher real estate cost, rising input prices and cost of compliance are the stumbling blocks for food retailing industry in India. Amongst the formats of retailing, traditional dominates the most as modern format is yet to increase the coverage, however, online grocery is emerging as is the fastest growing channel among modern retail due to its lower cost and convenience factor.

According to the report, Quick Services Restaurants (QSR) has emerged as the largest segment in the food services industry as there has been an increase in spending on fast food in Tier 1 and Tier 2 cities in the last few years. It is expected to grow at a CAGR of 25% by 2018 as the segment is largely unorganised and more foreign brands are expected to enter India. Home delivery of food, popularity of global cuisines and localisation of the menu are the emerging trends in the food services industry.

The author of this article is a reporter for the Times of India. The article can be found here.